I’ve been reading these forums for months, and have read a handful of investing books (Investing for Dummies, Boglehead Guide to Investing, and Rich as a King), but I still very much consider myself a “newbie,” so I decided to come here for some advice and insight.

Here is some quick info on me.

I’m 34 and self employed. I pay for my health and dental insurance each month.

I have no major debt—no student loans, no credit cards that need to be paid off or anything like that.

I left my old 9-5 job in 2014. I had a 401K there. I still have the 401K and it’s still invested. I haven’t done anything with it. I’d say there’s about $30K in there.

I have a SEP IRA. I have about 14K invested in the Fidelity 500 Index Fund (FUSVX). And another $30K in Fidelity Total Market Index Fund (FSTVX).

Outside of those retirement investments, when you combine both what’s in my bank savings account and my bank checking account, I have about $250K total in the bank.

So, I’d obviously like to begin doing something with some of this money that’s just sitting in the bank collecting barely any interest. As mentioned before, I’m self employed, so my earnings can fluctuate a little bit. But as of right now, I earn about $150K per year. It’s possible though that, at any given point in the future, that number could increase or decrease a decent amount.

So here are my questions:

1) What should I do with my 401K? As mentioned before, while I can of course no longer contribute to it, it is still invested (I believe it’s invested in Fidelity Freedom Funds that target the rough age of my retirement).

Should I keep it there? Move it? And can you please tell me the consequences of doing one versus the other, especially from a tax standpoint. I’ve been hesitant to do anything with it because I’ve read a bit of conflicting information on the subject. And even my CPA suggested that I should keep it where it’s at for now.

2) Another thing I was curious about is this:

Do I have any other tax advantaged account options? I don’t want to make this super complicated for myself (again, relative newbie who’s trying to do his best here), but before I consider taxable accounts, I was curious if there were any other options when it comes to tax advantaged accounts? Because from what I read, for example, I won’t be able to truly contribute a whole lot to a Roth (if anything at all?) because I earn too much money per year.

3) Now, for tax advantaged options…I was thinking about going with Vanguard, which I know many people are very familiar with. But of course, in reading a lot online, it sounds like people love the funds but are disappointed with the service. This concerns me a bit, because I’ve always felt that customer service is an indication of how the overall business is run.

It also concerns me that I could have a lot of money with Vanguard but be struggling with customer service professionals when it comes to getting information or answers in terms of managing it.

On the other hand, for a good amount of the money I’d want to invest, I’m in it for the long haul. Meaning, I don’t plan to need it for many, many years. I just want it to grow—and certainly grow far better than a savings account.

So, overall, I guess I’m just asking this: In your opinion, is Vanguard’s customer service issues overblown? How much should I be concerned about it? If you have a lot of money with Vanguard, do you feel comfortable about it, or does their customer service give you pause or cause for concern that, when and if you need them, it’s going to be a hassle?

4) From reading books and forums, I certainly like the idea of index funds. And so, I think that’s where I’d like to begin with taxable accounts (although I always open to other ideas).

But if I stuck to that plan, which index funds would you recommend, assuming I wanted to do a total market index fund and maybe an international one?

5) Regarding bond funds…these should be in tax advantaged accounts, correct? And are bond funds moreso a way to safeguard yourself or your overall investments in case things go wrong? In other words, people invest in bonds to “be on safe side,” but not to truly maximize their money’s potential growth, right?

6) I was also curious about taxes for funds I put in a taxable account. I have heard, for example, that certain Vanguard funds don’t issue distributions due to a patent the company has until 2023. And therefore, this means that if I had that fund in my taxable account, I wouldn’t owe any taxes that year.

Is this correct? (I’m going off the memory of what I read a while ago, so if this is incorrect, please let me know)?

And since I haven’t invested in a taxable account before…will whichever brokerage company I choose (Vanguard, Fidelity, Schwab, etc) send me a form in January or February every year that shows my gains, and that I can take to my CPA who does my taxes so he knows what my gains were from my investments when he does my taxes?

7) And lastly, how am I charged the annual expense ratio/fund management fees every year for the fund I’m invested in? Is it just deducted from the overall amount I have invested in the fund?

1) If there are low fee investment options (e.g., Fidelity Freedom Index Funds, not the "non-index" variety; or, any of Fidelity's low fee funds), leaving the money there is fine. Considerations include
- fees charged within the 401k vs. what you would pay in an IRA
- your desire for a Backdoor Roth IRA and how traditional IRA balances would affect that.
2) For the self-employed, a Solo 401(k) plan is the big one.
3) No direct experience, but Fidelity's solo 401k offering has been mentioned as being superior to Vanguard's. You might search for relevant threads.
4) See Three-fund portfolio - Bogleheads.
5) See Tax-efficient fund placement - Bogleheads
6a) Taxes may be lower, but not $0.
6b) You will get 1099-INT, 1099-DIV, and/or 1099-B (perhaps in a "consolidated 1099" report) forms.
7) It is deducted "behind the scenes" so you never see it as a line item. It is done on a daily basis and affects the value (aka price) of the fund.

Lot's going on here, but you're clearly on a great track. Here are my thoughts:

Cash vs Investing of $250K
$250K in cash sure sounds high, but as a (single?) self-employed 34 year old making 150K a year, I'm a bit nervous about future volatility of your income. As such, I'd recommend something like 1X of your annual spending to stay highly liquid and secure, such as in cash. When you also factor in other goals (house? marriage?), $250K may actually be the right number.

401k vs IRA and Roth Considerations
I would start doing back door Roth IRA contributions. In short, this let's you invest in a traditional IRA (without tax benefit), and immediately convert that into a Roth IRA (where you get future tax benefits). However, this process is much much easier if you don't have any other traditional IRAs. As such, to keep the conversions easy, I would leave the 401k assets as a 401k.

Vanguard vs Others
Vanguard is a fine option, but I personally lean towards Fidelity. They have provided me good customer service for many years, and have fee structures that are comparable with Vanguard. They also have an easy to use website. Ultimately, you can't go wrong with either.

What other tax advantaged tools to invest in?
A SEP IRA and back door Roth IRA are good starting points. A solo 401k may work here, but I'm not well versed in those.

Beyond that, you may want to consider an HSA. HSA's are not great options for everyone, but you may be able to set this up as a self-employed individual.

Beyond that, I actually like the idea of you having a taxable account - just a normal brokerage account with Fidelity or Vanguard (or whoever you work with). This provides some additional flexibility.

What about taxes???
If you open a taxable account with Fidelity, you'll pay some taxes each year. Fidelity will ship you a form in tax season, and you'll share that with your CPA. Easy peasy.

What about Funds that don't pay distributions until a later date?
I'm not familiar with funds that don't report distributions until some future date, but I'm also very hesitant to consider such a thing. In my experience, every tool that provides you a benefit beyond a normal portfolio comes at a cost or limitation that makes it a bad choice. If you want to consider these, do so in a year or two after your financial house is more in order.

What should you invest in?
To start off, I'd strongly suggest keeping it simple, and staying aligned with best practice. There is no easier way to do this than through target date funds. Both Fidelity and Vanguard offer these. Pick a 2050 fund (be sure that it's using index funds and has a tiny expense ratio) and call it a day.

Again, if you want to fine tune this in the future, that's great. But for now, and for the next few years, I'd keep it simple.

What about fees?
The financial industry has gone out of it's way to hide fees from you. Specifically, this means that the fees are taken out without you noticing... This makes it an easy process for the investor, but it does mean that we need to stay proactive, and only investing in funds that have a low expense ratio.

+1 on FiveK's post.
A solo 401k plan would allow you to contribute 18.5k more than you now contribute with a SEP IRA. Both plans allow the employer's contribution of 20% of earned income - 1/2 self-employment taxes.

As far as "gains" in a taxable account, if you don't sell a fund for a capital gain, there is no tax due on the fund's increase in value. However if you do sell, long-term capital gains are taxed at 0% if you file as MFJ and taxable income is below 77.2k (before 2018, it was the top of the 15% bracket). They are taxed at 15% if taxable income is >77.2k. If single, the 0% rate is up to 38.6k taxable income.

If you use Total Stock Mkt Index and Total Int'l Stock Mkt Index funds in the taxable account, most of the dividends these funds pay out will be "qualified" dividends. They are treated the same as long-term cap gains.

One option that hasn't been mentioned yet for tax advantaged savings is United States Series I Savings Bonds. They pay interest at a (currently small) fixed rate plus the rate of inflation. They allow you to shelter interest income for between 1 and 30 years. Their redemption value never decreases, although if inflation is negative it may not increase either. You can only purchase $10K/year at TreasuryDirect.gov plus $5K/year with your federal income tax refund.

You can also purchase $10K/year of Series EE Savings Bonds instead of the I Bonds, but their interest payments are very low unless you hold them for exactly 20 years.

That depends on whether or not you have employees. If you don't, you can open a solo 401k at Fidelity and roll the 401k over to it. (Vanguard's solo 401k does not allow incoming rollovers.) You would also want to roll your SEP IRA into the solo 401k. That removes all non-Roth IRAs and allows for the Backdoor Roth IRA method.

In a SEP IRA you can contribute ~20% of net income as the employER. In a solo 401k you can contribute the same ~20% as the employER plus $18.5K as the employEE up to the $55K limit.

But if I stuck to that plan, which index funds would you recommend, assuming I wanted to do a total market index fund and maybe an international one?

The best options in a taxable account are a total US stock index fund and/or a total international stock index fund. At Vanguard those would be:

Regarding bond funds…these should be in tax advantaged accounts, correct?

Correct.

And are bond funds moreso a way to safeguard yourself or your overall investments in case things go wrong? In other words, people invest in bonds to “be on safe side,” but not to truly maximize their money’s potential growth, right?

Bonds aren't about returns so much. They're more about diversification, cushioning the fall, and having dry powder (money for rebalancing).

I was also curious about taxes for funds I put in a taxable account. I have heard, for example, that certain Vanguard funds don’t issue distributions due to a patent the company has until 2023. And therefore, this means that if I had that fund in my taxable account, I wouldn’t owe any taxes that year.

I haven't heard anything about that. Many of Vanguard's index funds have "qualified" dividends which are taxed at a lower rate than regular dividends, sometimes even zero.

And since I haven’t invested in a taxable account before…will whichever brokerage company I choose (Vanguard, Fidelity, Schwab, etc) send me a form in January or February every year that shows my gains, and that I can take to my CPA who does my taxes so he knows what my gains were from my investments when he does my taxes?

You'll get a 1099-DIV for all dividends and capital gains distributions (when the fund sells some of its assets). Depending on the amount those may be reported on Schedule B or directly on the 1040 form. If you sell shares you'll get a 1099-B. Those get reported on Schedule D.

And lastly, how am I charged the annual expense ratio/fund management fees every year for the fund I’m invested in? Is it just deducted from the overall amount I have invested in the fund?

The expense ratio comes out in tiny increments every day. You never notice it. At Vanguard there are no separate management fees.

Thanks for your help, everyone! I really appreciate it. Thanks also for correcting me on some of my language that I fumbled a bit earlier.

I will answer a few questions and then I will just post my follow-up questions for clarity-sake.

1) Do I have employees? No, I am self employed but do not have any employees.

2) Am I single? Yes, I am single, not married as of now. No kids either as of now.

3) Thanks for suggesting the possibility of a solo 401K. I had not thought of this and will now look into it!

Just to be clear, if I opened a solo 401K, do you all think I should indeed roll over my 401K from my old job into the solo 401K? Or, keep the old 401K as is and just open the solo 401K?

4) Quick question about the Backdoor Roth IRA. You guys mentioned that I could essentially set up a traditional IRA, and then convert it to a Roth IRA. And this is, essentially, the Backdoor Roth IRA conversion.

a) Does it matter how long you wait to do the Backdoor Roth IRA conversion? In other words, if I were to invest in a traditional IRA on a Monday, would I convert it to a Roth IRA a couple days later? Weeks later? Months later? Does it not matter regardless?

b) You guys mentioned that, for the Backdoor Roth IRA, it’s much easier to do this if I don’t have any other traditional IRAs in place. When you say traditional IRAs, would that include my SEP IRA which I opened last year? My old 401K from my old job that's still invested? A solo 401K that some have suggested I look into?

5) As mentioned in my original post, I am already invested in FUSVX (Fidelity 500 Index Fund Premium Class) and FSTVX (Fidelity Total Market Index Fund Premium ) in my SEP IRA. Let’s say I stuck with Fidelity—would it be “wrong” of me to take additional funds I’d like to invest in a taxable…and put them into FSTVX, as well (and maybe an international fund like FTIPX)?

This is an example, of course, but I’m just curious to know if it’s “weird” to have money in one fund (FSTVX, in this example) inside a TAXABLE account, and money in the same fund (FSTVX) in a TAX ADVANTAGED account? Is that too much in the same pot, so to speak, and in turn a bad idea? Or, conversely, is it a good idea because at least the money that otherwise would be sitting in the bank is now in solid index fund?

6) Do you all think I should put money into bond funds now? Fellow poster Duckie mentioned above that bonds are good for “cushioning the fall.” Does this mean that, should the stock market plunge, my funds in the bonds will be hit the least?

I suppose I’m just trying to understand what most people use bonds for in this instance. In other words, do people use bond funds as money that can be available for an emergency? Perhaps you don’t expect to get great returns, but hopefully it’ll grow more than it would in the bank, and if something were to happen to your other investments, you can always access your money in bonds for that “rainy day” and likely have more money in that fund than maybe your other investments?

7) I think the reasons I was thinking about Vanguard were for these couple of reasons:

a) I am happy with my retirement accounts with Fidelity. But I have heard that if I went with a taxable account at Vanguard, many of the funds that would pay dividends would be—as a couple of you mentioned—qualified dividends. And so, that’s taxed at the long term cap gain rate of 15% (at least it would for me currently).

By contrast, I heard that some of Fidelity’s index funds certainly pay dividends…but a lesser percentage of them are qualified dividends like Vanguard (so instead of 100% qualified or 95% qualified, it might be 60% qualified at Fidelity). And, I believe, non qualified dividends would be taxed at one’s normal tax rate.

So, perhaps I’m overthinking this, but how important is something like this when determining whether I should stick with Fidelity or open up a taxable with Vanguard or Schwab or whoever? Especially when I’m not sure how I’d go about finding out what percent of dividends are qualified vs non qualified at Fidelity?

8) While reading Boglehead’s Guide to investing, they mentioned the following that caught my eye:

“The Total International Stock Index Fund dividends were only 68 percent qualified, but international stock funds are eligible for a Foreign Tax Credit as an offset.”

Going forward into the future, will the Foreign Tax Credit still be around? How does the new tax law impact this when it comes to the possibility of investing in a fund such as the Total International Index Fund?

9) Lastly, do you all think Fidelity will always compete with Vanguard when it comes to low expense ratios? I understand that low cost index funds are deemed to be Vanguard’s bread and butter, so I was wondering if it’s reasonable to assume that Fidelity will keep their index funds low as time goes on? I know we don’t have a crystal ball, but it crossed my mind and I just wanted to get your quick thoughts on it.

Just to be clear, if I opened a solo 401K, do you all think I should indeed roll over my 401K from my old job into the solo 401K? Or, keep the old 401K as is and just open the solo 401K?

Put the money in the one that has the funds you want at the lower price. Tie goes to the solo 401k.

a) Does it matter how long you wait to do the Backdoor Roth IRA conversion? In other words, if I were to invest in a traditional IRA on a Monday, would I convert it to a Roth IRA a couple days later? Weeks later? Months later? Does it not matter regardless?

"A couple days" seems about right. Any growth in the IRA is taxable when converting to the Roth, so get it into the Roth ASAP to minimize the growth and the consequent taxes.

b) You guys mentioned that, for the Backdoor Roth IRA, it’s much easier to do this if I don’t have any other traditional IRAs in place. When you say traditional IRAs, would that include my SEP IRA which I opened last year? My old 401K from my old job that's still invested? A solo 401K that some have suggested I look into?

Yes. No. No.

5) As mentioned in my original post, I am already invested in FUSVX (Fidelity 500 Index Fund Premium Class) and FSTVX (Fidelity Total Market Index Fund Premium ) in my SEP IRA. Let’s say I stuck with Fidelity—would it be “wrong” of me to take additional funds I’d like to invest in a taxable…and put them into FSTVX, as well (and maybe an international fund like FTIPX)?

No.

This is an example, of course, but I’m just curious to know if it’s “weird” to have money in one fund (FSTVX, in this example) inside a TAXABLE account, and money in the same fund (FSTVX) in a TAX ADVANTAGED account? Is that too much in the same pot, so to speak, and in turn a bad idea? Or, conversely, is it a good idea because at least the money that otherwise would be sitting in the bank is now in solid index fund?

...Going forward into the future, will the Foreign Tax Credit still be around? How does the new tax law impact this when it comes to the possibility of investing in a fund such as the Total International Index Fund?

VelvetMoon wrote:Just to be clear, if I opened a solo 401K, do you all think I should indeed roll over my 401K from my old job into the solo 401K? Or, keep the old 401K as is and just open the solo 401K?

It depends on the options/costs in the old 401k but yes, I think you should combine them. It's one less account to keep track of.

Does it matter how long you wait to do the Backdoor Roth IRA conversion? In other words, if I were to invest in a traditional IRA on a Monday, would I convert it to a Roth IRA a couple days later? Weeks later? Months later? Does it not matter regardless?

You do it as soon as possible because you don't want it to grow too much before converting. All growth is taxable. That's why it's best to use a money market fund in the TIRA. There will be no losses and minimal gains between contributing and converting.

You guys mentioned that, for the Backdoor Roth IRA, it’s much easier to do this if I don’t have any other traditional IRAs in place.

It's not so much that it's easier as that it's cheaper. Because of the pro-rata rule all non-Roth IRAs are considered one big fat IRA for IRS purposes and that means when you make a non-deductible contribution you don't want other IRA assets to make the conversion expensive. Take a look at IRS Form 8606. If you make a non-deductible contribution and convert it, anything on line 6 will affect the taxability of that conversion.

When you say traditional IRAs, would that include my SEP IRA which I opened last year? My old 401K from my old job that's still invested? A solo 401K that some have suggested I look into?

The correct phrase isn't "traditional IRAs", it's "non-Roth IRAs" which include accounts titled Traditional IRA, Rollover IRA (which is really just a TIRA), SEP IRA, and SIMPLE IRA. It does not include accounts titled "Inherited IRAs" or any 401k, 403b, 457b, pension, etc.

As mentioned in my original post, I am already invested in FUSVX (Fidelity 500 Index Fund Premium Class) and FSTVX (Fidelity Total Market Index Fund Premium ) in my SEP IRA. Let’s say I stuck with Fidelity—would it be “wrong” of me to take additional funds I’d like to invest in a taxable…and put them into FSTVX, as well (and maybe an international fund like FTIPX)?

It would not only not be wrong but you could even swap your FUSVX to FSTVX for a more compete fund.

This is an example, of course, but I’m just curious to know if it’s “weird” to have money in one fund (FSTVX, in this example) inside a TAXABLE account, and money in the same fund (FSTVX) in a TAX ADVANTAGED account?

No it's not "weird".

Is that too much in the same pot, so to speak, and in turn a bad idea?

You need to figure out your Asset allocation. Then you decide what goes where. If you have FSTVX in three, four, or five accounts that's fine as long as it fits your AA.

Do you all think I should put money into bond funds now?

Yes.

Fellow poster Duckie mentioned above that bonds are good for “cushioning the fall.” Does this mean that, should the stock market plunge, my funds in the bonds will be hit the least?